No Silver Lining Here

As bad as the prognosticators can be with their predictions for the price of gold, the situation for silver is even worse.

Some very recent headlines trumpeted the following proclamations:

“Silver prices to surge…”

“Silver…Why Prices Will Soar”

“Why You Must Own Silver…”

But my favorite headline expresses all of the emotion and confusion regarding silver quite aptly: “What Is Wrong With Silver?”

Maybe it would be better to ask “What Is RightWith Silver?” Exactly what is it that makes silver so special in the eyes of so many investors and advisers?

There are, of course, several things that others point to in their efforts to support their claims for much higher silver prices.

One is the accumulation of large amounts of physical silver by JP Morgan Chase Bank. But that should not necessarily indicate that the sky is the limit for silver prices.

It is inferred that JP Morgan’s accumulation of silver is bullish for silver prices; and favorable comparisons have been drawn between the bank’s activities regarding silver and the Hunt brothers accumulation efforts in the late 1970s.

But the Hunt brothers efforts did not turn out well. Even though silver prices soared (and definitely not just because of the Hunts’ buying, either) they came back down swiftly. In four months, from January 18, 1980 to May 22, 1980, the price of silver fell from $49.45 per ounce to $10.89 per ounce.

The decline didn’t end there, either. Twelve years later, in December 1992, silver traded as low as $3.67 per ounce.

It is worth pointing out that there were multiple factors in play at the time silver rose from $1.33 per ounce in November 1971 to its eventual high of $49.45 in January 1980. Speculation surrounding the Hunt family’s accumulation of silver only added fuel to the fire. And likely exacerbated things to the point that silver far exceeded any realistic price level that could be justified at the time. Hence, its price decline was considerably more severe than gold’s.

And just what are JP Morgan Chase Bank’s intentions regarding the hoard of silver they have accumulated? Corner the market? Drive the silver price much higher? Then sell with huge profits?

A big problem comes after the accumulation. When and how do you sell what you own in order to take those huge profits – without dumping excess supply on the market? Ask the Hunts. They had trouble liquidating at any price; even without ‘huge profits’.

But what if JP Morgan’s intentions are entirely different? What if their plan is to suppress the market price for silver? Not everyone wants higher silver prices.

The preceding paragraph may conjure up fantasies about conspiracies and price manipulation, or appear to add support to existing arguments about such. Don’t get carried away. It’s only meant to raise questions that aren’t usually asked by those who see anything and everything as a fundamental reason for their bullish price expectations.

Another favorable factor cited is silver’s apparent correlation with gold. Bullish expectations for gold’s price often lead to even more wildly bullish expectations for silver. And those expectations usually find a launch pad named the gold-to-silver ratio.

In the Mint Act of 1792, the U.S. government arbitrarily chose a 16 to 1 ratio of gold prices to silver prices. The actual prices were set at $20.67 per ounce for gold; and $1.29 per ounce for silver.

It might be reasonable to expect a ratio for purposes of consistency and uniformity within the existing monetary system. However, the price used and maintained for silver at $1.29 per ounce was considerably in excess of the current (then) market price.

In 1859, prospectors discovered the Comstock Lode in Virginia City, Nevada. It was the largest silver vein in the world. And the incredible amount of new silver supply ushered in a long period of woefully low market prices for silver compared to the official price of $1.29 per ounce.

For nearly seventy years the government bought all excess silver offered at the official price of $1.29 per ounce but silver’s actual market price dropped as low as $.25 per ounce in 1932.

As industrial use of silver increased during and after World War II and into the 1960s, the government reversed their position and became a willing seller of silver in order to keep the price from rising. Since they had accumulated a hoard of nearly two billion ounces of silver over the preceding seventy years, they were well positioned to do so.

As the price for silver approached once again the official price of $1.29 per ounce and threatened to exceed it, the government was faced with a cost for silver that exceeded the face value of coins in circulation. And it would cost more to mint new coins than they were actually worth. This was a principal factor in the U.S. government’s decision to stop issuing coins with ninety percent silver content after 1964.

The United States used silver as the primary metal in the content of its coinage for more than one hundred seventy years. And they did their best to maintain the official gold-to-silver ratio of 16 to 1 and the official price of $1.29 per ounce for silver during that period.

But silver’s history during the entire period is marked by price support and price suppression. There is nothing of substance to support a 16 to 1 ratio for gold-to-silver.

Below is a chart of the gold-to-silver ratio over the past one hundred years. It shows no patterns which support arguments for a return to 16 to 1. Or any other ratio for that matter.

Silver investors who are depending on a declining gold-to-silver ratio are betting that silver will outperform gold going forward. But, if anything, the chart (see link above) shows just the opposite. For the past fifty years, the ratio has held above a rising trend line taking it to much higher levels.

Arguments about a 16 to 1 gold-to-silver ratio aside, there is still an implied connection between the two metals. The supposed connection has some merits.

Both gold and silver have a long history of use as money; independently and concurrently. Some examples are the ancient Greeks (silver Drachma); Romans (gold as primary monetary unit and silver coins); British Empire (pound sterling – silver); and the Unites States (both gold and silver).

However, any connection between the two is limited. Simply defined:

Gold is real money (nothing else is). It is a medium of exchange, measure of value, and a store of value.

Silver is primarily an industrial commodity. Its use as money is secondary. And it is not a store of value.

After President Nixon severed any remaining links between gold and the U.S. dollar in 1971, both gold and silver could seek out their respective price levels on a market-oriented basis.

It was an opportunity for both to prove their ‘mettle’. And they did not disappoint. At least initially.

Culminating with their blow off tops in 1980, the gold-to-silver ratio returned to its vaunted 16 to 1 mark. But it even more quickly returned to higher levels and by 1993 was at its all-time high of 100 to 1.

On an absolute basis silver has failed to hold its own as ‘money’ by losing value over the past fifty years. You can see this on the chart below.

Since their simultaneous price peaks in January 1980, gold is fifty-eight percent higher and silver is sixty-six percent lower. In order for silver to reflect similar price action relative to gold as it pertains to the decline in value of the U.S. dollar, silver would need to be currently at $77.00 per ounce. It is obviously nowhere near that and didn’t get close to it even when it briefly approached $50.00 per ounce seven years ago.

Some will argue that this is why silver is due for an explosion upwards in price; and that it is temporarily and wrongly undervalued relative to gold.

Unfortunately, for silver bulls, the past two hundred fifty years of history gives no indication of support for this argument.

Advocates of silver love to point out a supply/demand imbalance, too. But that has always been a part of silver’s history, and sometimes inversely so; such as the seventy-year period after the Comstock Lode discovery, when the world was awash in silver.

The gap in consumption over production existing in the late sixties and early seventies was one of several things that contributed to much higher silver prices. But when all is said and done, and after decades of ‘fundamental’ arguments about such an imbalance, silver has failed to show any further signs of a need for revaluation in price because of consumption/production gaps, past or current.

It is quite possible that silver could stage another one of its price explosions. But if it does, it will be short-lived. And the subsequent price implosion would be as bad or worse as anything experienced previously.

Historically so, short-term or long-term, the case for higher silver prices is weak; and getting weaker.

Kelsey Williams is a retired financial professional living in Southern Utah. His website, Kelsey’s Gold Facts, contains self-authored articles written for the purpose of educating others about Gold within an historical context.

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